What is stamp duty and how does it work?

Stamp Duty Land Tax is a fee you pay the taxman depending on the value of the property you are purchasing.

After years of criticism, the slab system was replaced in 2014 and buyers will only be levied progressively above thresholds, in a similar way to how income tax works.

However, anyone purchasing an additional property may also face an extra 3 per cent charge on each threshold.

On the house: Stamp duty is charged every time you buy a property

How stamp duty works

Until 1997, 1% tax was levied when buying £60,000-plus properties. But chancellor at the time Gordon Brown saw the revenue rising opportunities as house prices rose, so first introduced the idea of percentage bands.

Before December 2014, stamp duty was paid on the whole value of a property.

Previously you would have paid 0% paid at 0 - £125,000,
1% paid on properties costing between £125,000 and £250,000, 3% between
£250,000 and £500,000 and 4% for more than £500,000.

So if you bought a property costing costing £251,000, you would pay £7,530 not just the amount over the threshold as you would do with income tax. This jump meant if your property costs £250,000 you will pay £2,500, if it costs £250,001 you will pay £7500.03.

The amount of income it generates makes politicians reluctant to change the charges, but there have been stamp duty holidays in the past for first-time buyers or in certain bands.

But the changes in the 2014 Autumn Statement mean most buyers will pay less stamp duty than before.

Since December 4 2014, bands are now 0% up to £125,000; 2% to £250,000; 5% to £925,000; 10% to £1.5million and 12% above that.

Under the new system anyone buying a home costing under £937,000 should pay less or the same, Treasury figures show.

Those buying a £200,000 home will pay £1,500 instead of £2,000. The big win though is for those previously caught in the 3% tax trap, someone previously hit with an £8,250 bill on a £275,000 home will now pay £3,750.

Meanwhile, those buying a £600,000 home will now pay £20,000 in tax, compared to £24,000 before.

Only those buying residential property costing more than £937,000 will face a bigger tax bill with the new system.

Tinkering: Labour's Gordon Brown and Tory chancellor George Osborne have both made stamp duty change

A different charge for landlords

Anyone purchasing an additional property will have to pay an extra 3 per cent stamp duty.

This change was announced by the chancellor George Osborne in December 2015 and introduced from April 1 2016.

The main focus on this policy is to free up housing stock for first-time buyers and to calm the buy-to-let market by deterring landlords who may not want to pay the higher tax.

The changes apply to companies and individuals no matter how many properties you are purchasing.

Anyone owning a second property that isn't their main residence and buying another, or replacing the one they don't live in, is likely to get caught up in the changes.

This will hit buy-to-let landlords as well as anyone purchasing a second home such as parents buying a property for their children or a couple purchasing a home together where one is already a homeowner.

Will you pay more? Answer the questions in this flow diagram to find out

The higher rates are 3 percentage points above the current residential rates, including the 0 per cent band.

They will be charged on the portion of the value of the property that falls into each band.

Anyone buying a £200,000 second home or buy to let before April pays stamp duty of £1,500.

This is based on paying zero per cent on the first £125,000 of the property value and 2 per cent on the portion between £125,001 and £250,000.

But since 1 April, landlords will have to pay 3 per cent for the first £125,000 and 5 per cent instead of 2 per cent on the amount between £125,001 and £250,00.

Due to soaring house prices in previous years and the nature of how it is charged, stamp duty is an unpopular tax.

The slab system was introduced
by Gordon Brown, as Chancellor. Before his time in charge of the
nation's finances stamp duty was a flat rate of 1% above £60,000. This
was changed to 1.5% above £250,000 in 1997 and 2% above £500,000 and
then 3% above £250,000 and 4% above £500,000 in 2000.

Since then the higher thresholds have failed to keep pace with rampant house price inflation.

Had they kept pace with property prices as measured by the Nationwide index, the £250,000 threshold would today stand at £787,500 and the £500,000 threshold would stand at £1,575,000.

The threshold was raised by the
Government from £60,000 to £120,000, in March 2005, in recognition of
the rising cost of housing and its impact on first-time buyers already
struggling to get on to the property ladder.

The threshold was raised further to £125,000 in 2006 - roughly in line with annual house price inflation from 2005 - 2006.

But
experts criticised this small rise claiming the cost of homes being
held just below the threshold would simply rise from £120,000 to
£125,000 and it would be counter-productive.

In 2011, Tory chancellor George Osborne has introduced a new 5% threshold above £1 million, and 7% above £2 million.

The 2014 changes mean 98 per cent of buyers pay less.

Bands are now 0% up to £125,000; 2% to £250,000; 5% to £925,000; 10% to
£1.5million and 12 per cent above that.

Stamp duty changes: can I avoid it?

Stamp duty calculator

House purchase

Price of house: (eg. 70000)£

Result

Stamp duty on house:£

The changes to stamp duty in 2003 meant that purchasers no longer had to submit documents providing details of the purchase to the Stamp Office for stamping. Instead their solicitor, or licensed conveyancer asks them to sign a Land Transaction Return form, which has all the information on.

But the new form was far more complex than the previous document and was designed to crackdown on people claiming to pay more for fixtures and fittings, therefore bringing the cost of the home below a threshold.

Instead of the previous Particulars Delivered form, a single page asking for the names and addresses of parties, location of the property and price paid, the new form introduced was six pages long and has 70 questions. It must be sent to HMRC, and the Land Registry will not register ownership until it has a certificate from taxman that the form has been received.

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